China – Protecting The Middle Class

In the southern boomtown of Shenzhen, normally docile legislators have been complaining with unusual vigour. Their worries, aired in the local media, are about the introduction on January 28th of the country’s first home-ownership tax in the cities of Chongqing and Shanghai. Some Shenzhen politicians fear their city could be the next to suffer what they describe as a blow to China’s growing middle class. They need not be so anxious.

In recent months fast-rising property prices in China (see chart) have put the Communist Party in a quandary. Avowedly socialist leanings mean that the party cannot easily ignore the complaints of the urban poor about the increasing difficulty of getting on the housing ladder. But most registered urban residents (barring migrants from the countryside, who rarely count in official statistics) own their own property. Few want to see prices drop. For them, the main concern is avoiding a crash.

Keeping the middle class happy is also the party’s concern. Over the past decade, despite a rhetorical shift to the left, the party has tailored policies to avoid antagonising such a politically crucial group. It has been adept at isolating and containing protests by angry farmers or the urban underclass, using a mixture of intimidation and pay-offs. But it is less sure that it could deal so adroitly with grievances shared by swathes of the middle class. After years of debate, the party is still tiptoeing around a property tax.

Its decision to press ahead now is part of stepped-up efforts since early last year, including two interest-rate rises, to curb speculation in the property market and show the poor it cares. In December home prices in 70 cities rose by 6.4% compared with a year earlier. In late January, just before Chongqing and Shanghai launched their property taxes, the authorities announced new market-cooling measures. These included higher downpayments for buyers of second homes. Owners of two or more homes were banned from buying more. The party also plans a big increase in the construction of government-subsidised housing.

Some officials have touted the new property tax as another market-dampening measure. But it is unlikely to have much impact on prices in the two cities. The tax rates are low and they affect only a small proportion of homeowners. In Shanghai the annual levy is 0.4-0.6% of a property’s value, and 0.5-1.2% in Chongqing. In Chongqing it applies only to luxury homes and in Shanghai only to owners of multiple top-end properties. The tax is cautiously described as a “trial”.

Last year reports in the state-controlled press suggested that Beijing and Shenzhen, as well as Chongqing and Shanghai, would be among the first cities to introduce such taxes. Now, it seems, the capital will wait. Though Shenzhen is still considering the possibility, it faces stiff opposition. “Shenzhen has no need to try out a property tax,” ran a headline in the Shenzhen Daily. It said this view was shared by many delegates at the city legislature’s annual meeting in January, and ran some indignant-sounding quotes.

On February 1st the prime minister, Wen Jiabao, burnishing his pro-poor credentials, told a gathering to celebrate this week’s lunar new year that his government would “resolutely prevent” an excessive pace of inflation and “unswervingly regulate and control” house prices. A week earlier Mr Wen had raised many eyebrows by visiting an office in Beijing to which citizens from around the country flock to seek redress in cases of local abuses of power. It was the first visit to such a place by a leader and was clearly aimed at showing sympathy with the marginalised.

Yet Mr Wen is cautious when dealing with high-handed local authorities. On January 21st, with much fanfare, the central government announced new regulations aimed at curbing the often brutal eviction of city residents to make way for urban development. The need for such rules has also long been debated, but the central government has delayed taking action in the face of stiff resistance from local governments. For them, grabbing residential land and reselling it to developers is a huge source of revenue.

The new regulations clarify the “public interests” that allow local governments to take over residential property. These include government building projects related to energy or transport infrastructure, or housing for the poor. They do not include commercial projects, which local governments often use to justify land appropriations. Forcing people out of their homes by cutting off utilities or road access is banned. Courts are to settle disputes.

But it is mainly poorer homeowners who are affected by these evictions, whereas the new rules leave local governments with great scope for carrying on as usual. The rules do not apply to evictions from rural land, where most disputes occur. In such cases, even more than usual, the courts are under the thumb of local governments.

One aim of the property tax is to provide local governments with a steady new income that will help wean them off their dependence on one-off land deals. Jia Kang, a government researcher who helped devise the tax, says it should result in fewer evictions and protests. It could, he says, even help promote local democracy, since taxpayers will expect a bigger say in how their governments are run. Another reason, perhaps, for not expecting property taxes to play too big a part.